[Nishant Pande is a 4th year BA LLB (Hons.) student at NALSAR University of Law]
The Dispute Resolution Panel (‘DRP’) is one of several bodies established in under the Income Tax Act, 1961 (the ‘IT Act’) to allow settlement of disputes with the help of an alternative dispute resolution (‘ADR’) mechanism. Section 253(2A) of the Act empowered the Revenue to prefer an appeal before the Income Tax Appellate Tribunal (‘ITAT’) against the direction issued by the DRP. However, this provision was omitted by way of the Finance Act, 2016. As the law currently stands, the Revenue can no longer appeal against directions of the DRP. A potential alternative, in case the DRP’s direction is prejudicial to the interest of the Revenue, is to approach a constitutional court invoking its writ jurisdiction. Thus, it is imperative to visit the tenability of this constitutional remedy argument, especially in light of the fact that approaching a constitutional court would require the Revenue to file a writ against itself, because it is the Assessing Officer (‘AO’) who passes the assessment order in conformation with the DRP’s directions.
Background to the Provision
The Finance Act, 2009 added section 144C to the IT Act which lay the foundation for the DRP. According to the Notes on Clauses for the Finance Bill 2009-10, this addition allowed the assessee an ADR remedy against the AO’s proposed order of assessment. Section 144C(8) empowers the DRP to confirm, reduce or enhance the variations proposed in the draft order, and the directions given by the DRP are binding upon the Revenue. As the law stood immediately after the Finance Act, 2009, while the assessee, if aggrieved, could directly appeal to the ITAT against the directions of the DRP, the Revenue had no avenue of appeal against the DRP’s direction in case it was aggrieved by the same. In order to address this loophole in the law, Finance Act, 2012 added section 253(2A) to the IT Act in order to authorize the Revenue to appeal before the ITAT if it had objections to the DRP’s directions.
Subsequently, on account of the legislature’s desire to minimize litigation, Finance Act, 2016 omitted Section 253(2A). Consequently, the Revenue is bound by the DRP’s direction and no provision of the Act allows it to prefer an appeal against the same.
The Procedure before the DRP
When the AO forwards a draft of the proposed order, the assessee has the option to either accept the draft or to object to it before the DRP or the AO. The DRP is tasked with guiding the AO for completion of the assessment. After considering the heads enumerated under section 144C(6), the DRP is expected to give its directions in less than nine months from the assessee’s objection. Although the DRP merely issues directions to the AO, the AO is legally bound to pass an assessment order in accordance with such directions. Thus, in practice, the assessment order of the AO was the direction issued by the DRP.
Ensuing the Finance Act, 2016 on account of absence of a statutory appeal for the Revenue against the DRP’s directions, there is yet again a vacuum in the law as there is no course of action contemplated under the Act which the Revenue can opt for in case the directions of the DRP are prejudicial to the interest of the Revenue.
Exercise of Revisional Jurisdiction under Section 263 of the IT Act
Section 263 allows the Commissioner of Income Tax (‘CIT’) to cancel the assessment of the AO if she considers the AO’s order to be prejudicial to the interest of the Revenue. However, in case of a draft order passed by the AO in conformity with the direction of the DRP, such an order has been held to be exempt from the exercise of section 263. The CIT cannot exercise a parallel power under section 263 to revise an order passed in conformity with the DRP’s directions. Also, as the DRP comprises of 3 CITs, the direction of the same cannot be overridden by one CIT.
Plausibility of a Constitutional Remedy against the Directions of the DRP
As there is no statutory remedy available to the Revenue to appeal against the directions of the DRP, a constitutional remedy through article 226 of the Constitution may be traced in order to devise a remedy for the Revenue. To interpret a statute, the intention of the legislature needs to be considered to decipher the rationale behind the enactment and the courts are duty bound to honour such the intention of the legislature. The intention behind the statute can be read in light of the reasons behind its enactment.
In the present case, Finance Act, 2009 envisaged the DRP to be an alternative to the CIT(A) in matters of assessment and Finance Act, 2012 envisaged it to be an entity separate from the AO by giving effect to the provision of Revenue’s appeal to the ITAT against the directions of the DRP. By allowing appeals against the directions of the DRP, the legislature implicitly conceded to the fact that, in matters of determining tax liability, the DRP is a separate entity from the Revenue. Further, when Finance Act, 2016 omitted section 253(2A), it cited administrative efficiency by way of minimizing litigation to be the reason for the same. Thus, it cannot be construed that the nature of the DRP as being a separate entity was extinguished by Finance Act, 2016.
As far as the structure of appeals under the Act is concerned, the Supreme Court has held that where the Act provides a complete machinery which stretches from assessment or reassessment of tax liability, imposition of penalty, etc., the assessee is barred from abandoning the machinery envisaged under the Act and seek relief by invoking the jurisdiction of the High Court under Article 226. Conversely, where the machinery contemplated by the Act is inadequate, the aggrieved party can be allowed to abandon the contours of the Act. In the present case, where no remedy to the Revenue is envisaged under the Act, the aggrieved party can seek relief by invoking the writ jurisdiction of the High Court.
The present case is complicated on account of the fact that the AO passes the order in question in conformity with the direction of the DRP; thus, the focus of enquiry shifts to whether the AO can approach the High Court against his or her own order? Generally the eligibility to file an appeal depends on whether the party is aggrieved or not. The Supreme Court has defined the expression ‘person aggrieved’ to include someone “whose right or interest has been adversely affected or jeopardized”. Further, for an appeal to lie to a higher court or authority, the Supreme Court has held that the prerequisite is the fact that adjudication took place. Moreover, as far as the question of adjudication is concerned, it has been held has that adjudicatory process involves the answer of critical legal questions and nuances of law.
In case the assessee objects to the AO’s assessment order before the DRP, the AO is bound to pass an assessment order in consonance with the directions of the DRP; here the adjudication regarding the additions made by the AO is made by the DRP and the AO is a mere signatory of the same. In the present case, it is the DRP which, through its direction, adjudicates upon the rights and interests of the Revenue and assessee. A direction passed against the Revenue interest renders it aggrieved and, thus, in the hypothetical situation wherein the AO has an avenue of statutory appeal against the direction of the DRP, the same can be legally justified. In addition, as the adjudication is undertaken by the DRP and not the AO, as far as decision-making regarding the tax liability of the assessee is concerned, the AO’s order and DRP’s direction can be differentiated from one another as adjudication is done by the DRP alone.
It is imperative to appreciate cases (here, here, here and here) wherein writ petitions have been filed by the Revenue against the Income Tax Settlement Commission (‘ITSC’) and the same have been held to be maintainable by the constitutional court. The ITSC is another ADR body established under the Act. Similar to the DRP, the Act does not provide for any statutory appeal against the orders issued by the ITSC, yet the constitutional courts have allowed a remedy against the same. There is also precedent to exhibit that a writ petition against the DRP is maintainable before constitutional courts.
Hence, in light of all the cases cited in the aforementioned paragraphs and the principles of law cited, there lies a possibility for the Revenue to file a writ before the High Court in case the direction of the DRP is contrary to the interest of the Revenue.
After the omission of section 253(2A) which allowed the Revenue to file an appeal to the ITAT against the DRP’s direction through the AO, this post argues in favour of the possibility of the Revenue to approach the High Court by way of writ jurisdiction envisaged under article 226. The post argues, in light of the fact that the adjudication of the assessment of taxable income of the assessee is undertaken by the DRP and not the AO, that the DRP exists as a separate legal entity contemplated in the provisions of the Act. The argument is buttressed by way of the legislature’s intent to not dilute the separate legal character of the DRP but to only extinguish the plausibility of the Revenue’s appeal against its directions citing minimisation of litigation as the reason for the same. The argument is further augmented by the fact that writ petitions can be maintained against other the ITSC, which is another ADR body envisaged under the Act. However, it is pertinent to note that this avenue shall only be available to the Income Tax Department if and only if the direction issued by the DRP is prejudicial to the interest of the Revenue.
– Nishant Pande
Can you mention any case laws which states that the assessment order passed pursuant to DRP’s directions cannot be revised by CIT u/s 263?